A Call to Tie Pay to Risk

As the worldwide financial fiasco unfolded over the past year, risk became the buzzword in boardrooms around the globe. And as analysts began circulating white papers on the need for risk-adjusted compensation, the question for many C-level leaders has become: How will this affect my personal bottom line?

The rationale for a no-pay-for-nonperformance system stems from the idea that there is a tendency for leaders and individual employees to focus on their short-term compensation and not think about the long-term risks that their choices create for the company. Under a risk-adjusted compensation system, salaries are adjusted downward in the short term, in accordance with the level of risk being generated for the firm. If that risk doesn't materialize, the executive or employee receives the deferred compensation.

"There's definitely a trend toward more risk-adjusted compensation in financial services in particular," says Gerard McNamara, managing partner of the CIO practice for executive recruiter Heidrick and Struggles. Risk-adjusted pay plans will increase in any industry where regulatory control and scrutiny are on the rise, says Howard Rubin, president and CEO of Rubin Worldwide and a Gartner senior advisor.

Whether or not CIOs will see risk-adjusted pay bundled into their compensation packages is an open question. "It's all very hazy, but with the whole financial industry going crazy right now, everything is being looked at," says McNamara. Rubin predicts that risk-adjusted pay is more likely to increase for executives who have an influence on enterprisewide risk, not those leaders, like the CIO, who only have an influence on operational risk.

"Where you will see it for CIOs is in companies that have the belief that all compensation across the enterprise needs to be risk-adjusted and everyone's pay should be adjusted downward if bets don't go right," says McNamara. In those cases, "it's a group motivator," says Rubin, and "the CIO can play a creative role in using IT to manage firm risk more effectively."

Of course, deferred compensation based on performance is nothing new for many IT leaders. A CIO typically has a compensation package including base pay, short-term bonuses and long term bonuses in a mix of cash and equity, commensurate with other executives at their level, says McNamara. Over the past several years, CIOs have increasingly seen a portion of their pay tied to the delivery of major IT milestones.